Govt to frontload borrowing in FY20, two-thirds in first half

The fiscal year ending March 31 is an exception as government reduced first half borrowings to contain rising bond yields. This year government borrowed 47.50 per cent of total requirements in first half.

The government has been typically borrowing 60-65 per cent of its total requirement in the first half in recent years. (Source: REUTERS/Thomas White/Illustration/File Photo)

The government on Friday announced plans to borrow 62.3 per cent of its next year’s gross borrowing in the first six months of the fiscal. It will borrow Rs 4.42 lakh crore in the first half (April-September) of the fiscal 2019-20.

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The government has been typically borrowing 60-65 per cent of its total requirement in the first half in recent years. This is done as first half of the year has somewhat lower credit demand from private corporate sector. So higher borrowings do not crowd out fund availability for private sector. The fiscal year ending March 31 is an exception as government reduced first half borrowings to contain rising bond yields. This year government borrowed 47.50 per cent of total requirements in first half.

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Higher H1 borrowing plan likely prompted by softening of bond yields

Softening of bond yields over the past few months probably prompted the government to go for higher borrowings in the first half. This helps the government to borrow at a lower cost. A front loading also provides states more room to borrow in the second half of the financial year, since the Centre has met bulk of its requirements in the first six months itself. Also, first six months are a lean season for private corporate borrowers, allowing Centre to conduct its debt raising with least disruption. Traditionally, the government has borrowed more in the first half.

The Finance Ministry also announced plans to launch a new 7-year benchmark government security, in order to provide a variety of debt papers and widen the maturity bucket. As per the Union Budget, the gross borrowing was pegged at Rs 7.1 lakh crore for 2019-20, higher than Rs 5.71 lakh crore in 2018-19. Briefing reporters on the government’s borrowing programme for 2019-20, Finance and Economic Affairs Secretary Subhash Chandra Garg said after accounting for repayments, the net market borrowing will be roughly at the same level as in recent years. Net borrowing would be Rs 3.4 lakh crore in the first half of the next fiscal, as rest of the funds will be raised to meet repayments for prior years’ debt.

In the second half of FY20, the government plans to raise a total of Rs 2.68 lakh crore. While the Secretary said government will stick to the current year fiscal deficit target of 3.4 per cent of the GDP, it has been facing pressures in the current month of March.

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The government is struggling to meet its tax collection targets with direct tax mop-up at only 85.1 per cent of the revised estimate of Rs 12 lakh crore in addition to a likely shortfall on the indirect taxes front as well. Flagging these concerns, the Central Board of Direct Taxes (CBDT) in a missive to field formations on March 26 termed the negative growth in collections over last week as an “alarming situation which needs immediate attention” and has asked them to “take all possible actions” to achieve the collection targets. According to data released by Controller General of Accounts on Friday, fiscal deficit for eleven months of the current year (April-February), touched 134.2 per cent of the revised estimate, mainly due to moderate revenue growth. The CBDT missive states that the government, as on March 23, has collected only Rs 10.21 lakh crore, which is 85.1 per cent of the revised estimate of Rs 12 lakh crore.

Garg said the government will also be announcing a switch calendar for the next year, and bond switches will be done on the third Monday of each month. This is done to better manage repayment obligations, as bonds with shorter maturity can be switched with longer maturity papers or vice versa. He said the maturity bucket of government securities is also being extended from 15-19 years at present to 15-24 years. “This time we will also be announcing a switch calendar. We will not be stating the amount, but will be (stating the calendar),” he said.

The government raises funds from the market to fund its fiscal deficit through dated securities and treasury bills. It will also be raising treasury bills of Rs 20,000 crore every week in Q1. In contrast to government bonds, treasury bills have maturity of less than one year. To ensure that heavy borrowings do not disrupt the bond market, the Centre has also increased reliance on the National Small Savings Fund — shifting a higher proportion of borrowings to the NSSF since this year.